How to Make Getting Small Business Loans Easier
It is notoriously hard for small businesses to get loans, and it’s a problem that seems to be evergreen. If you’re just starting out, or operating on a slim, restaurant-like margin, how do you demonstrate to a bank that you’re creditworthy? What if you need a boost to get past a bad sales quarter or rebound from unexpected expenses?
Fortunately for small businesses, there are some genuine alternatives to a regular bank loan. There are a variety of different entities that are interested in lending to businesses that don’t qualify for a bank loan, including various nonprofit organizations like Community Development Financial Institutions (CDFIs), Kiva, and the Small Business Association (SBA). The SBA doesn’t directly lend money; rather it guarantees the loan from a lender who wouldn’t otherwise extend credit to the business in question.
But finding a lender is just one piece of the puzzle. Before you go hunting for a loan, you have to know what kind of loan you need—not only how much you need, but how long you’ll need it for. This is information any responsible lender will want, and the more specific your answers are, the happier a prospective lender will be. And, the more likely it is you’ll be able to pay the loan back on time, improving your business’s credit!
What kind of money do you need?
The first step is identifying what the loan is for. According to the wise folks at Nerdwallet, your need will likely fall into one of four basic categories:
- Starting a business
- Managing day-to-day expenses
- Growing your business
- Developing a safety cushion
Starting a business is a fairly self-explanatory category, and developing a safety cushion is pretty much what it sounds like. Just like you as an individual should have the equivalent of three months’ salary (at least) saved up for a rainy day, your business should also have a cushion. Of course, you want the cushion lined up before you need it. This can mean having money in the bank or a line of credit that’s exclusively for extreme circumstances.
Once you’re in business, most of your financial needs will center around working capital (day-to-day expenses) and occasional influxes of cash to help you grow.
Managing day-to-day expenses generally means covering regular expenses, like inventory, rent, and payroll. If this is what you need, you’ll likely be looking for a working capital loan. Working capital loans are also good for helping your business through a slump and unexpected expenses, like repairs. Depending on the amount, these loans may also be appropriate to cover new equipment or smaller expansion projects.
If you’re looking to open a second (or third!) location, hire one or more employees, or launch a new product, you’ll need something more than working capital. These kinds of loans will have different names (expansion loans, real estate loans, and so on), depending on the lender.
How long do you need the money?
The next step is determining how long you’ll need the money, or how long it will realistically take you to pay back the loan. If, for example, you are buying a piece of equipment, how long will it take for that equipment to generate the cost of the loan? Something else to consider when taking out a loan to purchase equipment is how long the equipment will be in service. As the financial experts over at NerdWallet point out, clearly, you don’t want to be paying down a loan on a piece of equipment after you’ve already had to replace it, or after you no longer need it.
It’s easy to conceptualize the question of repayment in relation to a piece of equipment, but the same principle applies to any kind of loan. If you’re hiring a new employee or opening a new location, when will that investment start paying for itself?
There are two reasons you need to know how long you’ll need the loan money. Reason one is so that the loan does what it should do—get you over a hump or expand your business—and doesn’t lead to a financial problem, like taking out more loans once the first one runs out. Reason two is that “How will you pay back this loan?” is a question a lender should be asking you.
The more detailed an answer you can provide, the better for your business. This is where a business plan comes in. A business plan will help you map out what you’ll do with the loan money (and make sure you ask for what you need), what return you expect to get from that investment, and how soon you’ll see that return. Unless you’ve already had to close up shop, it’s never too late to make a business plan. If you made one when you got started, now’s the perfect time to update it.
The more predictable you can make your financial future, the better. You and your lender will sleep better.
Now that you’ve got a game plan for your loan, it’s time to find the right lender.
A match made in financial heaven
Different lenders specialize in different kinds of loans. Some lenders offer (or insist upon) business coaching along with the loan. Some lenders focus on microloans. Do a little research and find out who in your area offers small business loans, and what kind of loans are available.
For example, Kiva offers microloans from $1,000 to $10,000, while the SBA will help you get a loan of up to $5 million. (The SBA’s version of a microloan is under $50,000.) The Mission Economic Development Agency’s Adelante Fund offers microloans of $5,000 to $100,000, and come with free (bilingual!) business coaching.
Places to get started
Venturize has a handy online calculator that helps you figure out what kind of loan you need based on your answers to four questions. You’ll need to think through more than those four questions, but it’s a good place to start.
Find out what nonprofit lenders, including CDFIs, are in your area. (Kiva lends nationwide.)
Regardless of which lender you go with, it’s incumbent upon borrowers to know what they’re getting into when signing loan papers. The best way to do that is to ask questions. The Small Business Borrowers’ Bill of Rights is a document that outlines what borrowers can expect from responsible, ethical lenders. (You can see a list of the voluntary signatories.) Though the document isn’t in the form of questions, it does provide a sense of what you should know, and what kinds of answers you want to hear from a prospective lender.